UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 2004.
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from ______ to _______
Commission File Number 000-19709
NUWAY MEDICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 66-0159115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2603 Main Street, Suite 1150
Irvine, California 92614
(Address, including zip code, of principal executive offices)
(949) 235-8062
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.0067 par value.
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [_] No [X]
The number of shares of the Registrant's Common Stock outstanding as of
March 31, 2004 was 46,322,736 shares and as of February 28, 2005 was 51,822,736
shares.
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format (Check one): Yes [_]| No [X]
NUWAY MEDICAL, INC.
FORM 10-QSB
INDEX
Page
----
GENERAL NOTE 3
PART I
ITEM 1 Financial Statements 3
ITEM 2 Management's Discussion and Analysis 12
ITEM 3 Controls and Procedures 23
PART II
ITEM 1 Legal Proceedings 24
ITEM 2 Changes in Securities 25
ITEM 3 Defaults Upon Senior Securities 27
ITEM 4 Submission of Matters to a Vote of Security Holders 27
ITEM 5 Other Information 27
ITEM 6 Exhibits and Reports on Form 8-K 28
SIGNATURES 29
EXHIBIT INDEX 30
EXHIBIT 10.1 31
EXHIBIT 31.1 33
EXHIBIT 31.2 34
EXHIBIT 32 35
2
GENERAL NOTE
This Amendment No.1 to the Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2004, is being filed for the purpose of (i) correcting certain
values contained on the balance sheet at March 31, 2004; statements of
stockholders' deficit; and statements of cash flows, which were inaccurately
transcribed in the preparation of the original filing of this report, (ii)
eliminating certain unnecessary line items from the statements of cash flows and
(iii) rounding certain values contained in Part I, Item 2, for consistency of
presentation of such values.
PART I
Item 1. Financial Statements
NUWAY MEDICAL, INC AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
ASSETS
March 31, December 31,
2004 2003
(unaudited) (unaudited)
----------- -----------
CURRENT ASSETS
Cash and Cash Equivalents $ 282 $ 671
------------ ------------
Total Current Assets 282 671
------------ ------------
PROPERTY AND EQUIPMENT, NET -- --
------------ ------------
OTHER ASSETS
Marketing Database -- --
Med Wireless License -- --
------------ ------------
Total Other Assets -- --
------------ ------------
TOTAL ASSETS $ 282 $ 671
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 1,382,655 $ 1,256,475
Notes Payable 1,582,100 1,605,000
Discount on Note, Net -- (62,131)
Debentures Payable, Net 26,151 125,000
------------ ------------
Total Current Liabilities 2,990,906 2,924,344
------------ ------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
SHAREHOLDERS' EQUITY
Convertible Preferred Series A, $.00067 Par Value, 25,000,000
Shares Authorized, 559,322 Shares Issued and
Outstanding at March 31, 2004 and December 31, 2003 375 375
Common Stock, $.00067 Par Value, 100,000,000 Shares
Authorized, 46,322,736 and 36,386,486 Shares Issued
At March 31, 2004 and December 31, 2003, respectively 30,633 23,976
Additional Paid-In Capital 23,398,361 23,002,818
Accumulated Deficit (26,292,989) (25,823,838)
Treasury Stock, at cost, 44,900 Shares Held as of March 31,
2004 and December 31, 2003 (127,004) (127,004)
------------ ------------
Total Shareholders' Equity (2,990,624 (2,923,673)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 282 $ 671
============ ============
See accompanying notes to unaudited consolidated financial statements.
-3-
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDING
MARCH 31, 2004 AND 2003
For the period ending March 31
2004 2003
(unaudited) (unaudited)
----------- -----------
Revenue
Rental Income $ -- --
------------ ------------
Total Revenues -- --
------------ ------------
Costs and Expenses
Selling, General and Administrative 368,596 1,088,637
Depreciation, Depletion and Amortization -- --
------------ ------------
Total Costs and Expenses 358,596 1,088,637
------------ ------------
Loss from operations (358,596) (1,088,637)
------------ ------------
Other Income and Expense
Interest Expense (105,156) (35,082)
Other Income 4,600 --
------------ ------------
Net Other Expense (100,556) (35,082)
------------ ------------
Loss Before Income Taxes (469,152) (1,123,719)
Provision for Income Taxes (Benefit) -- --
------------ ------------
Net Loss from Continuing Operations (469,152) (1,123,719)
------------ ------------
Loss from Discontinued Operations
(Includes $217,250 of depreciation and amortization expense and
$3,693,250 of impairment charge of intangible assets) -- (3,877,973)
------------ ------------
Net Loss $ (469,152) $ (5,001,692)
============ ============
Loss Per Common Share - Basic and Diluted
Loss per share from Continuing Operations $ (0.01) $ (0.05)
============ ============
Loss per share from Discontinued Operations $ (0.00) $ (0.19)
============ ============
Net Loss per Share, rounding $ (0.01) $ (0.24)
============ ============
Weighted Average Common Share Equivalents Outstanding 38,618,877 21,013,109
============ ============
See accompanying notes to unaudited consolidated financial statements.
-4-
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' DEFICIT (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 2004
Preferred Stock Common Stock
--------------- ------------
Number Par Number Par Additional Retained
of Value of Value Paid-In Earnings Treasury
Shares $.00067 Shares $.00067 Capital (Deficit) Stock
---------- --------- ------ -------- -------- --------- ------
BALANCE DECEMBER 31, 2003 559,322 375 36,386,486 $23,976 $23,002,818 $ ( 25,823,838) $(127,004)
STOCK ISSUED FOR SERVICES 9,180,000 6,151 360,898
CONVERSION OF
DEBENTURES 600,000 402 29,598
SALE OF COMMON STOCK 156,250 104 5,047
NET LOSS (469,152)
---------- -------- ----------- ------- ----------- ------------- ----------
BALANCE MARCH 31, 2004 559,322 $ 375 46,322,736 $30,633 $23,398,361 $ (26,292,989) $ (127,004)
=========== ======== =========== ======= =========== ============= ===========
See accompanying notes to unaudited consolidated financial statements.
-5-
NUWAY MEDICAL, INC AND SUBSIDIARY
STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIOD ENDING
MARCH 31, 2004 AND 2003
Three Month Period Ending
March 31,
-----------------------------
2004 2003
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (469,152) $(5,001,692)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Issuance of Stock for Services 298,350 1,473,515
Cancellation of prior year warrant compensation
Write Down of Idle Furniture, Fixtures and Office Equipments
-- 20,292
Loss on disposal of Discontinued Operations
-- 3,877,973
Amortization of Discount on Note 62,131
Increase (Decrease) in Accounts Payable and Accrued Expenses 126,180 (532,907)
----------- -----------
Net Cash Used In Operating Activities 17,511 (162,819)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
----------- -----------
No Cash Used In or Provided by Investing Activities -- --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to reduce Note Payable (22,900)
Proceeds from Sale of Common Stock 5,000
Proceeds from Sale of Preferred Stock 169,011
----------- -----------
Net Cash Provided By Financing Activities (17,900) 169,011
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (389) 6,192
CASH AND CASH EQUIVALENTS - BEGINNING 671 521
----------- -----------
CASH AND CASH EQUIVALENTS - ENDING $ 282 $ 6,713
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASHFLOW INFORMATION
Cash Paid During the Period for:
Interest $ --
=========== ===========
Income Taxes $ --
=========== ===========
Conversion of Debentures and Accrued Interest to Capital $ 98,849
=========== ===========
See accompanying notes to unaudited consolidated financial statements.
-6-
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
- 11 -
Note 1. Accounting Policies-Basis of Presentation
In the opinion of management, the accompanying balance sheets and related
interim statements of operations, cash flows, and stockholders' equity include
all adjustments, consisting only of normal recurring items, necessary for their
fair presentation in conformity with accounting principles generally accepted in
the United States of America (U.S. GAAP). Preparing financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Actual results and
outcomes may differ from management's estimates and assumptions. Estimates are
used when accounting for stock-based transactions, uncollectible accounts
receivable, asset depreciation and amortization, and taxes, among others.
Interim results are not necessarily indicative of results for a full year.
The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in the NuWay Medical, Inc. Annual Report on Form 10-KSB for the year
ended December 31, 2003.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation. The results of operation for the
quarter ended March 31, 2003 gives effect to the Company's discontinued
operations.
Note 2. Business and Organization
Outlook
As of March 31, 2004, and as of February 28, 2005, the Company had no
continuing business operations. Any perceived value in the Company is both
speculative and intangible in nature. The Company is operating as a public shell
and its business operations consist of management seeking merger and acquisition
candidates with ongoing operations.
These consolidated financial statements have been prepared assuming the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. During
2003, 2004 and as of February 28, 2005, the Company had limited liquid and
capital resources while seeking acquisition opportunities.
Cash and cash equivalents totaled $282 at March 31, 2004. We had no
revenues in the three-month period ended March 31, 2004 and were forced to
consume cash on hand to fund operations. The Company's cash position is
insufficient to meet its expenses. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2004 and
until a merger candidate with operations of its own is located and a transaction
is consummated. While the Company is actively seeking investments through
private investors and other parties, there is no assurance that the Company will
be able to raise additional capital for the entire period required.
-7-
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As of March 31, 2004, the Company had limited liquid and capital
resources and management is incurring personal losses, while seeking acquisition
opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to attract new sources of capital, establish an
acquisition or reverse merger candidate with continuing operations, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations.
For the three-month period ended March 31, 2004, the Company raised
$71,959. During the remainder of 2004, the Company raised an additional
$149,074, for a total of $221,033. These funds were raised through straight debt
financing, convertible debt financing, and equity financing, as described below.
Note 3. 2004 Stock Compensation Plan Share Issuance
During the three-month period ended March 31, 2004, the Company issued
9,180,000 shares of its common stock to approximately 14 individuals, comprised
of consultants, directors and employees. Of this amount, 5,980,000 shares were
issued from the Company's 2004 Equity Plan and the Company recorded a selling,
general and administrative expense in the amount of $333,000 for such issuances.
During the three-month period ended March 31, 2003, the Company issued
11,360,919 shares of its common stock to approximately 17 individuals. Of this
amount, 8,727,329 shares were issued from the Company's 2002 and 2003 stock
compensation plans, and the Company recorded a selling, general and
administrative expense in the amount of $843,000 for such issuances. Of the
$333,000 recorded for the three-month period ended March 31, 2004, $135,000
related to consulting services, $80,000 related to Board of Directors expense,
and $118,000 related to salary expense. Of the $843,000 recorded in the
three-month period ended March 31, 2003, $548,000 related to consulting
services, none related to Board of Directors expense, $94,000 related to salary
expense, and $259,000 related to legal expense.
Note 4. Due to President - Unreimbursed business expenses
The Company's President, Dennis Calvert, loaned money to the Company by
paying from his personal funds certain of the Company's expenses. A significant
portion of these personal funds was obtained by Mr. Calvert by refinancing his
primary residence and cashing out equity thereon. For the three-month period
ended March 31, 2004, Mr. Calvert loaned to the Company $66,959. From October,
2003 to February 22, 2005, Mr. Calvert loaned the Company a total of $143,141.
As of March 31, 2004, and February 22, 2005, the Company repaid $105 and $41,371
of this amount, respectively. On March 7, 2005, the Company and Mr. Calvert
agreed such that the $101,770 still outstanding and owed by the Company to Mr.
Calvert will be repaid under the terms of a promissory note bearing interest of
10% per annum, requiring monthly payments and maturing on January 15, 2006.
-8-
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
As of February 28, 2005, the Company had accrued an expense related to the
unpaid accrued compensation due its president, Mr. Calvert, in the amount of
$232,900.
Note 5. Sales of Unregistered Securities
On January 31, 2004, the Company issued 30,000,000 shares of its common
stock to the PMG Shareholders pursuant to its obligations in the PMG Stock
Purchase Agreement. The Stock Purchase Agreement was rescinded on October 14,
2004, effective as of January 31, 2004, and those shares were cancelled and
returned to treasury.
In February 2004, the Company received gross and net proceeds of $5,000
from an individual investor in connection with the sale of 156,250 shares of the
Company's common stock. The issuance of the shares described above was made in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended.
On February 17, 2004, the Company issued 600,000 shares of its common
stock to former convertible debenture holders to partially satisfy its
obligations on a settlement agreement. The shares issued reduced the Company's
settlement obligations by approximately $17,000.
On February 23, 2004, the Company issued a warrant that expires in five
years to Sachi International, Inc. to purchase up to 3,000,000 shares of common
stock at $0.04 a share. The Warrant vests based on the amount of investment
proceeds brought to the Company by the Holder, with 100% vesting if the Holder
brings $500,000 in investment capital. In the event less than $500,000 is
invested, the warrant vests in a pro-rata amount. The closing of any such
investment shall be in the sole and absolute discretion of the Company. Sachi
International, Inc. has not met the conditions for the warrant to vest.
On March 11, 2004, the Company issued 3,200,000 shares of its common stock
to in exchange for services rendered to the Company. Of these shares, 3,000,000
were issued to members of the Company's board of directors, and 200,000 were
issued to legal counsel, in the total amount of $128,000.
Note 6. Subsequent Events
-9-
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Sales of Unregistered Securities
On September 3, 2004, the Company received gross and net proceeds of
$25,000 from two individual investors in connection with the sale of 5,000,000
shares of the Company's common stock.
On October 4, 2004, the Company received gross and net proceeds of $50,000
from an outside investor and issued its convertible promissory note due and
payable one year from the date of issuance. The note bears interest at a rate of
10% per annum, payable on the maturity date. The note can be converted, in whole
or in part, into shares of the Company's Series A Preferred stock, on the basis
of $.005 per share, at any time prior to maturity by either the Company or the
lender. Each share of Series A Preferred Stock may be converted by the holder
into one share of the Company's common stock. If the noteholder converts the
note into Series A Preferred Stock, on or after the note's original maturity
date the noteholder may require the Company to buy back the shares of Series A
Preferred Stock for 110% of the principal amount of the promissory note (the
"Buy Back Provision"). If the Company is unable to do so, the Company's
president, Dennis Calvert, has agreed to buy back the shares on the same terms.
If shares of Series A Preferred Stock are converted into common stock, the
holder has the right to include (piggyback) the shares of common stock in a
registration of securities filed by the Company (other than on Form S-4 or Form
S-8).
The Company's payment obligations under the note may be accelerated upon
the following events: (i) the sale of the Company's assets outside the ordinary
course of business; (ii) a breach of the representations and warranties
contained within the agreement evidencing the loan; (iii) the failure to timely
pay the note; (iv) the Company's default in any other loan obligation greater
than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
On November 4, 2004, the Company received gross and net proceeds of
$10,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On December 16, 2004, the Company issued 500,000 shares of its common
stock to its remaining former convertible debenture holder to partially satisfy
its obligations on a settlement agreement. The shares issued reduced the
Company's settlement obligations by approximately $8,700.
On January 6, 2005, the Company received gross and net proceeds of $25,000
from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On January 7, 2005, the Company received gross and net proceeds of $75,000
from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the notes
do not include buy back provisions, and allow conversion into a total of
18,000,000 shares of common stock (at $0.0042 per common share, rather than
$0.005 per Series A Preferred share).
-10-
NUWAY MEDICAL, INC. AND SUBSIDARY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
On February 10, 2005, the Company amended its obligations to Dr. James
Seay (the "noteholder") under its promissory note dated November 20, 2003 in the
principal amount of $50,000 and which matured on February 18, 2004. On the
maturity date of the note the Company was obligated to pay the noteholder
$65,000. The Company has paid the noteholder $30,000 and the balance of $35,000
remains outstanding. The amendment to the note entered into on February 10,
2005, (i) extends the maturity date of the note to February 3, 2006, (ii)
provides for interest to accrue at a rate of 10% per annum (15% upon default),
and (iii) allows for the conversion of the note into 7,000,000 shares of the
Company's common stock, or $.005 per share.
In February, 2005, the Company received gross and net proceeds of $16,000
from three outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the note
does not include buy back provisions, and allow conversion into a total of
2,261,701 shares of common stock (at $0.007 per common share, rather than $0.005
per Series A Preferred share).
On February 24, 2005, the Company received gross proceeds of $40,000 and
net proceeds of $36,000 from two outside investors and issued convertible
promissory notes on substantially the same terms as the previously described
notes, except the notes do not include buy back provisions, and allow conversion
into a total of 4,000,000 shares of common stock (at $0.01 per common share,
rather than $0.005 per Series A Preferred share).
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
Litigation
On December 4, 2004 the Company was sued by the law firm of Enenstein
Russell and Saltz, LLP to collect fees that had been billed to the Company in
the amount of $15,233, which had been disputed by the Company. The Company is
defending its rights in the lawsuit. The case is in its beginning stage, and a
trial date has not been set. While the Company believes that it has meritorious
positions in this litigation, given the inherent nature of litigation, it is not
possible to predict the outcome of this litigation or the impact it would have
on the Company.
-11-
Item 2. Management's Discussion and Analysis
This Quarterly Report on Form 10-QSB of NuWay Medical, Inc. (the
"Company") contains forward-looking statements. These forward-looking statements
include predictions regarding, among other things, our:
o general and administrative expenses;
o liquidity and sufficiency of existing cash;
o sale or other disposition of our technology; and
o The outcome of pending or threatened litigation.
You can identify these and other forward-looking statements by the use of
words such as "may," "will," "expects," "anticipates," "believes," "estimates,"
"continues," or the negative of such terms, or other comparable terminology.
Forward-looking statements also include the assumptions underlying or relating
to any of the foregoing statements.
Such statements, which include statements concerning future revenue
sources and concentrations, selling, general and administrative expenses,
research and development expenses, capital resources, additional financings and
additional losses, are subject to risks and uncertainties, including, but not
limited to, those discussed elsewhere in this Form 10-QSB, that could actual
results to differ materially from those projected.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth below under the heading "Risk Factors" in our Annual Report on Form 10-KSB
for the year ended December 31, 2003. All forward-looking statements included in
this document are based on information available to us on the date hereof. We
assume no obligation to update any forward-looking statements.
Unless otherwise expressly stated herein, all statements, including
forward-looking statements, set forth in this Form 10-QSB are as of March 31,
2004, and we undertake no duty to update this information.
Plan of Operations
Overview
The Company had no continuing business operations as of March 31, 2004 and
as of February 28, 2005. Over the course of several years, the Company has
attempted to enter various businesses through the acquisitions of entities
operating ongoing businesses or technology that needed to be developed and
marketed. However, as a result of various factors, but primarily due to its lack
of adequate capital and the inability to secure financing successfully, these
acquisitions could not be properly exploited and integrated to produce
profitable operations by the Company. Management of the Company has elected to
dispose or discontinue through sales or other means, these acquisitions,
-12-
including the Company's attempt to develop and market the 15-year licensing
rights acquired from Med Wireless, Inc. (Med Wireless) in July 2002. The Med
Wireless technology consists of software that is compliant with HIPAA, to
electronically organize, store and retrieve medical records and medical images.
During 2003, management of the Company deemed it necessary to discontinue the
Company's attempt to develop and market the Med Wireless and Player Record
Library System ("PRLS") technologies.
Based on the rapid increase in the number of well-capitalized companies
offering competing technologies, as well as the fact that the Company has been
unable to continue funding any technology enhancements or development related to
the Med Wireless technology, management came to believe that the technology had
lost the ability to be a viable competing technology in its sector and that it
was not in the Company's best interest to continue to pursue the Med Wireless
technology. Moreover, management is doubtful if the Med Wireless technology will
be considered of any significant value to a prospective buyer or licensee of the
technology. The Company is attempting to sell this technology, but expects to
realize only nominal net proceeds, if any, for the technology.
In addition, the Company has abandoned its efforts to market a variety of
products and services to the sports industry with an emphasis on health and
technology related products, primarily PRLS. The Company is attempting to sell
its interest in its majority-owned subsidiary, NuWay Sports, LLC ("NuWay
Sports"), which was established to market the PRLS technology, but expects to
realize only nominal net proceeds, if any, for its interest.
The Company operated as a public shell during all of 2004 and operations
primarily consisted of the Company's president seeking funding, maintaining the
corporate entity, complying with the requirements of the Securities Exchange
Commission (the "SEC") and seeking merger and acquisition candidates or new
business opportunities. The Company will need working capital resources to
maintain the Company's status and to fund other anticipated costs and expenses
during the year ending December 31, 2004 and beyond. The Company's ability to
continue as a going concern is dependent on the Company's ability to raise
capital to, at a minimum, meet its corporate maintenance requirements. If the
Company is able to acquire an ongoing business and/or technology that must be
exploited, it would need additional capital until and unless that prospective
operation is able to generate positive working capital sufficient to fund the
Company's cash flow requirements from operations.
As a result of the dramatic change in direction of the Company's scope and
focus, the abandonment of its technologies and the discontinuance of its
remaining operating businesses, comparisons of year-to-year and
quarter-to-quarter results of operations are not meaningful. Thus the activity
in the three-month period ended March 31, 2004 is not comparable to the
three-month period ended March 31, 2003.
-13-
Abandoned Acquisition
On January 31, 2004, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with Premium Medical Group, Inc., a Florida
corporation ("PMG") and PMG's sole stockholders, Eduardo A. Ruiz and Luis A.
Ruiz (the "PMG Stockholders"). Prior to this transaction, there was no business
or other relationship between the Company and its affiliates and PMG or the PMG
Stockholders.
Pursuant to the Stock Purchase Agreement, the Company agreed to acquire
100% of the shares of PMG from the PMG Stockholders in exchange for 30,000,000
shares of the Company's common stock, subject to certain adjustments. The exact
number of Company Shares to be issued to the PMG Stockholders was subject to
adjustment in the event certain revenue was or was not generated by PMG during
one year following the closing of the transaction. PMG had been organized in
June 2003 to provide medical products to hospitals and medical clinics in South
America, primarily Venezuela. Luis A. Ruiz became a director of the Company in
connection with the transaction.
The parties had a difference in expectations regarding who would be
ultimately responsible for paying for the audit of PMG that was required in
order for the Company to complete its disclosure obligations under the
Securities Exchange Act. Additionally, the Company did not have a sufficient
number of authorized and unissued shares of its common stock to both satisfy its
obligations to the PMG Stockholders and to issue shares of common stock in a
meaningful financing transaction, given the low price per share at which the
Company's common stock trades. The Company lacked the financial resources to
schedule a stockholders' meeting, prepare a proxy statement and solicit proxies
for the purpose of amending its Certificate of Incorporation to increase its
authorized capital stock.
As a result of these and other factors, the Company and PMG never
consolidated their operations, the Company never exercised control over PMG or
its operations and the parties never exchanged stock certificates evidencing
their ownership in each other.
Therefore, the parties entered into discussions and concluded amicably
that it was in the mutual best interest of the respective companies and their
respective stockholders, to rescind the transactions provided for in the Stock
Purchase Agreement and return all parties to their respective positions prior to
the transactions contemplated in the Stock Purchase Agreement.
The parties entered into a Rescission Agreement on October 14, 2004 that
provides, in relevant part, that (i) all transactions contemplated by the Stock
Purchase Agreement shall be rescinded as if the Stock Purchase Agreement had
never been executed and delivered; (ii) the parties forever waive all rights to
receive stock in PMG and the Company, as the case may be; (iii) Luis A. Ruiz
shall resign as a director of the Company; and (iv) the Company and PMG shall
file appropriate documents with the Secretary of State of the State of Florida
with respect to the rescission of the exchange of shares provided for in the
Stock Purchase Agreement.
-14-
Results of Operations
The Company had no revenues from continuing operations during the
three-month period ended March 31, 2004, compared to $35,000 during the
three-month period ended March 31, 2003. This decrease in revenue is
attributable to the fact that NuWay Sports marketed the Med Wireless and PRLS
technologies and generated $35,000 of revenue in the three-month period ended
March 31, 2003, whereas the technologies were abandoned prior to the
commencement of the three-month period ended March 31, 2004. NuWay Sports is now
held for sale; consequently the results of operations related to this subsidiary
have been reclassified in our consolidated statement of operations as a loss
from discontinued operations.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $369,000 for the
three-month period ended March 31, 2004, compared to $1,089,000 for the
three-month period ended March 31, 2003. This decrease is primarily attributable
to the fact that the Company discontinued operations in 2003 and therefore
incurred lower operating expenses in 2004. The largest components of these
expenses were:
a. Salaries and Payroll-Related Expenses: These expenses were
$177,000 for the three-month period ended March 31, 2004, compared to
$54,000 for the three-month period ended March 31, 2003, an increase of
$123,000. The increase is almost entirely attributable to an expense
recorded by the Company for the issuance of 3,000,000 shares of the
Company's common stock to an officer of the Company in lieu of cash
compensation in the amount of $118,000, and relates to the efforts by
management to obtain additional financing, comply with SEC reporting
requirements, and find a viable merger candidate.
b. Consulting Expenses: These expenses were $3,000 for the
three-month period ended March 31, 2004, compared to $548,000 for the
three-month period ended March 31, 2003, a decrease of $545,000. This
decrease is primarily attributable to the Company's lack of continuing
business operations in 2004. Consulting expense for the three-month
period ended March 31, 2004 included $140,000 of expense related to the
issuance of the Company's common stock, which was offset by a reversal
of accrued consulting expense relating to the issuance (and subsequent
return to treasury) of the Company's common stock totaling $142,000.
There were 3,800,000 shares issued related to the consulting expense
recorded for the three-month period ended March 31, 2004.
c. Legal Expenses: These expenses were $157,000 for the
three-month period ended March 31, 2004, compared to $259,000 for the
three-month period ended March 31, 2003, a decrease of $102,000. This
decrease is primarily attributable to the high level of legal
assistance required in 2003 for matters such as (i) addressing NASDAQ
compliance issues (ii) a major shift in the Company's core business,
and (iii) numerous stock issuances to consultants.
-15-
Expenses Associated With Stock Issued for Services
During the three-month period ended March 31, 2004, the Company issued
9,180,000 shares of its common stock to approximately 14 individuals, comprised
of consultants, directors and employees. Of this amount, 5,980,000 shares were
issued from the Company's 2004 Equity Plan and the Company recorded a selling,
general and administrative expense in the amount of $333,000 for such issuances.
During the three-month period ended March 31, 2003, the Company issued
11,360,919 shares of its common stock to approximately 17 individuals. Of this
amount, 8,727,329 shares were issued from the Company's 2002 and 2003 stock
compensation plans, and the Company recorded a selling, general and
administrative expense in the amount of $843,000 for such issuances. Of the
$333,000 recorded for the three-month period ended March 31, 2004, $135,000
related to consulting services, $80,000 related to Board of Directors expense,
and $118,000 related to salary expense. Of the $843,000 recorded in the
three-month period ended March 31, 2003, $548,000 related to consulting
services, none related to Board of Directors expense, $94,000 related to salary
expense, and $259,000 related to legal expense.
Discontinued Operations
As discussed above and in the notes to our consolidated financial
statements contained in this report, we have disposed of all of our operating
entities or discontinued all of our operations. The Company recorded a loss from
discontinued operations for the three-month period ended March 31, 2003 of
$3,878,000, and a net loss from continuing operations for the three-month period
ended March 31, 2003 of $1,124,000.
Net Loss
Net loss for the three-month period ended March 31, 2004 was $469,000, or
$(0.01) per share, compared to a net loss of $5,002,000, or $(0.24) per share
for the three-month period ended March 31, 2003.
The Company has relied upon its 2004 Equity Plan to compensate consultants
and employees who have assisted in developing and executing the Company's
business plan. This reliance, together with issuances of stock by the Company
other than pursuant to these plans, has significantly narrowed the loss per
share.
Liquidity and Capital Resources
General
Cash and cash equivalents totaled $282 at March 31, 2004. We had no
revenues in the three-month period ended March 31, 2004 and were forced to
consume cash on hand to fund operations. The Company's cash position is
insufficient to meet its expenses. The Company will be required to raise
additional capital to sustain basic operations through the remainder of 2004 and
until a merger candidate with operations of its own is located and a transaction
is consummated. While the Company is actively seeking investments through
private investors and other parties, there is no assurance that the Company will
be able to raise additional capital for the entire period required.
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The Company's consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. As of March 31, 2004, the Company had limited liquid and capital
resources and management is incurring personal losses, while seeking acquisition
opportunities.
Ultimately, the Company's ability to continue as a going concern is
dependent upon its ability to attract new sources of capital, establish an
acquisition or reverse merger candidate with continuing operations, attain a
reasonable threshold of operating efficiencies and achieve profitable
operations.
For the three-month period ended March 31, 2004, the Company raised
$71,959. During the remainder of 2004, the Company raised an additional
$149,074, for a total of $221,033. These funds were raised through straight debt
financing, convertible debt financing, and equity financing, as described below.
Straight Debt Financing
The Company's President, Dennis Calvert, loaned money to the Company by
paying from his personal funds certain of the Company's expenses. A significant
portion of these personal funds was obtained by Mr. Calvert by refinancing his
primary residence and cashing out equity thereon. For the three-month period
ended March 31, 2004, Mr. Calvert loaned to the Company $66,959. From October,
2003 to February 22, 2005, Mr. Calvert loaned the Company a total of $143,141.
As of March 31, 2004, and February 22, 2005, the Company repaid $105 and $41,371
of this amount, respectively. On March 7, 2005, the Company and Mr. Calvert
agreed such that the $101,770 still outstanding and owed by the Company to Mr.
Calvert will be repaid under the terms of a promissory note bearing interest of
10% per annum, requiring monthly payments and maturing on January 15, 2006.
Convertible Debt Financing
For the three-month period ended March 31, 2004, the Company did not raise
any funds through convertible debt financing. During the remainder of 2004, the
Company raised $60,000 and issued convertible promissory notes due and payable
one year from the date of issuance. The notes bear interest at a rate of 10% per
annum, payable on the maturity date, and can be converted, in whole or in part,
into shares of the Company's Series A Preferred stock, on the basis of $.005 per
share, at any time prior to maturity by either the Company or the lender. Each
share of Series A Preferred Stock may be converted by the holder into one share
of the Company's common stock. If the noteholder converts the note into Series A
Preferred Stock, on or after the note's original maturity date, the noteholder
may require the Company to buy back the shares of Series A Preferred Stock for
110% of the principal amount of the promissory note (the "Buy Back Provision").
If the Company is unable to do so, the Company's president, Dennis Calvert, has
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agreed to buy back the shares on the same terms. If shares of Series A Preferred
Stock are converted into common stock, the holder has the right to include
(piggyback) the shares of common stock in a registration of securities filed by
the Company (other than on Form S-4 or Form S-8). Please see Part II, Item 2
"Changes in Securities".
Equity Financing
During the three-month period ended March 31, 2004, the Company received
gross and net proceeds of $5,000 from the sale of 156,250 shares of its common
stock which were restricted and unregistered. During the remainder of 2004, the
Company received gross and net proceeds of $50,000 from the sale of 5,000,000
shares of its common stock which were restricted and unregistered. Please see
Part II, Item 2 "Changes in Securities".
Other Obligations
Significant debt obligations at March 31, 2004 included:
(i) $420,000 (plus interest) due to Augustine II, LLC (the
"Augustine Fund"), described in more detail below;
(ii) a $1,120,000 note payable which was purchased in March 2003 by
New Millennium Capital Partners, LLC, an entity owned and controlled by
the Company's president, Dennis Calvert, and certain members of his
family, together with accrued but unpaid interest, described in more
detail below.
(iii) approximately $26,000 outstanding remaining on a settlement
agreement with former convertible debenture holders; and
(iv) $42,100 due to a former advisory board member, reduced from a
promissory note dated November 20, 2003 in the principle amount of
$65,000.
For the three-month period ended March 31, 2004, there was $43,000 of
accrued interest recorded related to these obligations. As of December 31, 2004,
there was $189,000 of accrued interest recorded related to these obligations.
Augustine Fund Note
On June 10, 2003 the Company entered into a Term Loan Agreement ("Loan
Agreement") with the Augustine Fund, pursuant to which the Augustine Fund agreed
to lend the Company $420,000, payable in installments of $250,000, $100,000, and
$70,000 (the "Augustine Loan"). The proceeds of the Augustine Loan were used by
the Company for working capital.
-18-
Principal and interest, at an annual rate of 10%, of the Augustine Loan,
was originally due on February 29, 2004. In addition, the Loan Agreement
contains certain requirements that the Company make mandatory prepayments of the
Augustine Loan from the proceeds of any asset sales outside of the ordinary
course of business, and, on a quarterly basis, from positive cash flow. In
addition, all or any portion of the Augustine Loan may be prepaid by the Company
may prepay all or any portion of the Augustine Loan at any time without premium
or penalty.
As additional consideration for making the Augustine Loan, the Augustine
Fund received five-year warrants to purchase up to 6,158,381 shares of the
Company's common stock at an exercise price of $0.16 per share. The Company
could require that the warrants be exercised if certain conditions were
satisfied. Since these conditions were not fully satisfied by the maturity date,
the Loan Agreement provides that the Augustine Fund may, at any time following
the maturity date and so long as the warrants remain exercisable, elect to
exercise all or any portion of the warrants pursuant to a "cashless exercise",
whereby the Augustine Fund would be issued the net amount of shares of our
common stock, taking into consideration the difference between the exercise
price of the warrants and the fair market value of our common stock at the time
of exercise, without having to pay anything to the Company for such exercise.
As security for the Augustine Loan, New Millennium Capital Partners LLC
("New Millennium"), a company controlled and owned by the Company's president,
Dennis Calvert, and members of his family, pledged 2.5 million shares of the
Company's common stock owned by New Millennium, and, in addition, the Company
has granted the Augustine Fund a security interest in its 51% membership
ownership interest in NuWay Sports. As a result, the Company will need to
consent of the Augustine Fund to release its security interest in NuWay Sports
if the Company is able to sell NuWay Sports.
Prior to the original maturity date of the Augustine Loan, the Company
spoke with representatives of the Augustine Fund and advised them that the
Company was unable to pay the amount due under the Augustine Loan by the
February 29, 2004 maturity date. On March 30, 2004, the Augustine Fund agreed to
extend the maturity date of the Loan Agreement to August 2004. In addition to
the extension of the maturity date, the Augustine Fund was given the option of
having the Augustine Loan satisfied in cash or by the conversion of any
remaining principal balance and any accrued interest on the Augustine Loan to
shares of the Company's common stock at a 15% discount to market, so long as
Augustine Fund's holdings do not exceed 4.9% of the total issued and outstanding
shares of the Company's common stock at any time. In addition, the warrants held
by the Augustine Fund to purchase 6,158,381 shares of the Company's common stock
were re-priced to an exercise price of $.035 per share. Exercise of the warrants
is also subject to the limit that the Augustine Fund does not hold more than
4.9% of the issued and outstanding shares of the Company's common stock. The
Company recorded $14,000 of interest expense as of March 31, 2004, related to
the Augustine Loan.
On March 7, 2005, the Company and the Augustine Fund agreed to extend the
maturity date of the Augustine Loan to May 2006, in exchange for the issuance of
a warrant that gives the Augustine Fund the right to purchase 8,000,000 shares
of the Company's common stock at $0.005 per share for a period of five years.
The final documentation of the extension and the warrant is being finalized and
has not yet been completed.
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Obligation to New Millennium
In conjunction with the acquisition from Med Wireless of the license for
the Med Wireless and PRLS technologies on August 21, 2002, the Company assumed a
$1,120,000 note (the "Note") with interest at 10% per annum payable by Med
Wireless to Summitt Ventures, Inc. ("Summitt Ventures"). Summitt Ventures is
controlled by Mark Anderson, a former consultant and principal stockholder of
the Company. The Note is secured by the Company's assets and was originally due
on June 15, 2003.
As part of a series of transactions that the Company undertook to separate
itself completely from Mr. Anderson, on March 26, 2003, Summitt Ventures sold
the Note, together with 4,182,107 shares of the Company's common stock owned by
Mr. Anderson's affiliates, Camden Holdings and Summit Healthcare, Inc. ("Summit
Healthcare"), to New Millennium, in exchange for a $900,000 promissory note
issued by New Millennium in favor of Summitt Ventures, Camden Holdings, and
Summit Healthcare (the "New Millennium Note"). The New Millennium Note is
secured by all of the stock of the Company owned by New Millennium and Mr.
Calvert. (See "Augustine Fund Note" above.) Other than Mr. Calvert, no
individual, entity or party presently or previously associated with the Company
has ever had any ownership interest in New Millennium. Mr. Anderson, a principal
of those companies that sold and/or licensed the technologies to the Company,
conditioned the transaction with New Millennium on the Company's agreeing to
convert the Note to common stock.
Since New Millennium purchased the Note, the Company has attempted
multiple times to convert the Note, but has been unable to obtain the required
stockholder vote, due to a lack of quorum, to do so. The three attempts are
described below.
On March 26, 2003, the Company's board of directors voted to convert the
Note by New Millennium into 22,400,000 shares of common stock of the Company, at
a conversion price discounted 37.5% from the then market price of $0.08. New
Millennium agreed to this conversion.
In arriving at a conversion price, the board of directors determined that
a 37.5% discount to market price was appropriate based on a number of factors,
including that (i) with the quantity of the shares that would be issued, a block
of shares that size could not be liquidated without affecting the market price
of the shares, and (ii) the shares would be "restricted shares" and could
therefore not be sold by New Millennium in the public markets prior to two years
from the date of the conversion, and thereafter would be subject to the volume
and manner of sale limitations of Rule 144 under the Securities Act of 1933.
Subsequent to the vote by the board to convert the Note, the Company
received notification from Nasdaq's Listing Qualifications Department that
converting the Note without stockholder approval violated certain Nasdaq
Marketplace Rules. In response to this notification, the board, with the
concurrence of New Millennium, voted to amend its resolution and delay
conversion of the Note until the Company's stockholders approved the conversion.
-20-
At the Company's June 6, 2003 board meeting, Mr. Calvert, on behalf of New
Millennium, and the Company, through the unanimous action of the board (with Mr.
Calvert abstaining), agreed that, in light of current market conditions (namely
the significant increase in the trading price of the Company's common stock
since March 26, 2003, the date on which the conversion of the Note was
originally approved by the board, from $0.08 to $0.28 as of June 6, 2003), it
would be inequitable for New Millennium to convert the Note at the originally
agreed to $0.05 per share price. Mr. Calvert, on behalf of New Millennium, and
the Company orally agreed to rescind the agreement to convert the Note.
In addition, New Millennium orally agreed with the Company to extend the
maturity date of the Note to a first payment due October 1, 2003 in the amount
of $100,000 and the balance of the principal due on April 1, 2004, with interest
due according to the original terms of the Note (to correspond to the payment
terms of the New Millennium Note), and furthermore to reduce the Company's
obligation on the Note to the extent that New Millennium might be able to reduce
its obligation on the New Millennium Note. While the prior holder of the Note,
Summitt Ventures, purported to condition New Millennium's purchase on the
conversion of the Note, Mr. Calvert has represented to the Company that due to
Mr. Anderson's actions (as previously described by the Company in its Quarterly
Report on Form 10-QSB for the quarter ended March 31, 2003), Mr. Calvert now
believes that conversion of the Note is no longer a required term of the
agreement between New Millennium and Summitt Ventures.
The Company was unable to make the $100,000 payment on the Note on the
extended due date of October 1, 2003. At a board meeting on October 15, 2003,
the board decided to put the issue of conversion of the Note to the Company's
stockholders at a special meeting of the stockholders scheduled for December 9,
2003. The stockholders meeting was held on December 9, 2003, but adjourned
without a vote, because not enough shares to constitute a quorum were
represented. The stockholders meeting was rescheduled for December 30, 2003, at
which a quorum was also not present. Because this was the second attempt to
obtain a quorum, and more than 4,000,000 additional shares were required to be
voted to obtain a quorum, the board adjourned the meeting indefinitely. As a
result, the Note was not converted into stock and the outstanding principal
amount, together with accrued and unpaid interest, remains as a liability of the
Company.
In conjunction with the Company's January 31, 2004 purchase of PMG (later
rescinded in October 2004), and as a condition to purchase, the PMG Shareholders
required the Company to convert the note so as to eliminate the obligation from
the Company's balance sheet. At a meeting on February 10, 2004, the board of
directors voted to convert the note into 30,869,992 shares of its common stock,
at a conversion price of $0.04, discounted 20% from the then market price of
$0.05. New Millennium agreed to this conversion. In arriving at a conversion
price, the board of directors determined that a 20% discount to market price was
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appropriate based on a number of factors, including (i) the holding period of
the stock will be two years, and thus is not liquid until that point, and (ii)
the amount of the stock issued would make it impossible to liquidate the stock
at the current market price. This discount was equal to the discount proposed to
the stockholders in December 2003 at the abandoned stockholders meeting, and
less than the discount used by the board at the first conversion attempt in
April 2003.
The board approved the conversion knowing that, since its conversion was a
condition imposed by the PMG Shareholders, they (who would hold 45% of the
Company's common stock at the time of such meeting) would provide the additional
shares necessary to obtain a quorum and formal stockholder approval. Stockholder
approval was also necessary to increase the number of authorized shares
necessary to convert the Note. However, due to lack of operational capital, the
Company was unable to remain current in its SEC filings, and thus was unable to
hold the required stockholder meeting.
In October 2004, as discussed in "Abandoned Acquisition" above, the
Company, PMG and the PMG Stockholders rescinded the Stock Purchase Agreement.
Because the board of director's decision to convert the Note was based in part
on the requirements of the PMG Stock Purchase Agreement, the board on October
28, 2004, determined not to convert the Note. Considering that the Company at
the time was a shell corporation with no operations, Mr. Calvert also agreed to
extend the maturity of the Note indefinitely until the Company's status changed.
Accordingly, as of March 31, 2004, the principal amount of the loan,
together with $28,600 in accrued but unpaid interest, had not been repaid.
Under the terms of the New Millennium Note, it is possible that Summitt
Ventures, Camden Holdings, and Summit Healthcare may have a claim to reacquire
the shares of the Company's common stock that were sold to New Millennium. The
New Millennium Note is purportedly secured by the purchased shares of the
Company's common stock; however, New Millennium and Mr. Calvert believe that Mr.
Anderson and his affiliates have not perfected their security interest in those
shares. In addition, the Augustine Fund is the pledgee of 2,500,000 of these
shares and has physical possession of those shares.
New Millennium has informed the Company's board of directors that New
Millennium still intends to fully convert the Note to stock as soon as it is
practical, following stockholder approval. As of the date of the filing of this
report, the stockholder vote has not taken place and the Note has not been
converted into shares of the Company's common stock.
Critical Accounting Policies
The SEC recently issued Financial Reporting release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on their most
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critical accounting policies. In FRR 60, the SEC defined the most critical
accounting policies as the ones that are most important to the portrayal of a
company's financial condition and operating results, and require management to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Based on this
definition, the Company's most critical accounting policies include: non-cash
transactions and compensation valuations that affect the total expenses reported
in the current period and/or values of assets received in exchange.
The Company has established a policy relative to the methodology to
determine the value assigned to each intangible acquired with or licensed by the
Company and/or services or products received for non-cash consideration of the
Company's common stock. The value is based on the market price of the Company's
common stock issued as consideration, at the date of the agreement of each
transaction or when the service is rendered or product is received, as adjusted
for applicable discounts.
The methods, estimates and judgments the Company uses in applying these
most critical accounting policies have a significant impact on the results of
the Company reports in its financial statements.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: Our management
evaluated, with the participation of our Chief Executive Officer and Chief
Financial Officer, the effectiveness of our disclosure controls and procedures
as of the end of the period covered by this Quarterly Report on Form 10-QSB.
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. It should be noted that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.
(b) Changes in internal control over financial reporting: There was no
change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-QSB that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
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PART II
Item 1. Legal Proceedings
In June 2002, Geraldine Lyons, the Company's former Chief Financial
Officer, sued the Company and the Company's former president Todd Sanders, for
breach of her employment contract. The lawsuit was brought in the Circuit Court
of the 11th Judicial Circuit in Miami-Dade County in Florida. Ms. Lyons seeks
approximately $25,000 due under the contract and the issuance of 100,000 shares
of common stock, with a guarantee that the stock could be sold by Ms. Lyons for
$300,000. Ms. Lyons alleges that additional funds are due under her employment
contract; that the contract requires the Company guarantee that she can sell for
$300,000 the 100,000 shares of stock the Company is required to issue her; and,
that Mr. Sanders promised to purchase from her 100,000 shares of Company common
stock held by her at the price of $4.00 per share.
The Company has counter-sued Ms. Lyons for breach of fiduciary duty,
fraud, violation of Section 12(a)(2) of the Securities Act of 1933, violation of
Section 517.301 of the Florida Statutes, negligent misrepresentation, conversion
and unjust enrichment resulting from the required restatement of the Company's
financial statements for the years ended December 31, 2000 and December 31,
1999. The restatements corrected the previous omission of certain material
expenses related primarily to compensation expense arising from warrants issued
and repriced stock options, as well as other errors.
The case is ongoing at this time, although it is not being vigorously
prosecuted by Ms. Lyons or the Company, in the Company's case primarily because
the Company currently lacks the resources to do so. While the Company believes
that it has meritorious positions in this litigation, given the inherent nature
of litigation, it is not possible to predict the outcome of this litigation or
the impact it would have on the Company.
In May 2004, the Company was sued by Flight Options, Inc., a jet plane
leasing company, in the Superior Court of Orange County California. The lawsuit
alleges that the Company owes Flight Options approximately $418,300, pursuant to
a five-year lease assigned to the Company by the Company's former president Todd
Sanders, from his corporation, Devenshire Management Corporation. Management of
the Company believes that the assignment of the lease was not properly
authorized or approved by the Company, and that by Mr. Sander's failure to
identify the lease in a December 2002 settlement agreement with the Company, he
breached the terms of that settlement agreement and, pursuant to the settlement
agreement, must indemnify the Company for any losses owed to Flight Options. The
Company has cross-complained against Mr. Sanders for indemnity, and has added
the affirmative claim of breach of fiduciary duty. The case is still in its
initial discovery phase, and the Court recently set the case for trial in April
2005. While the Company believes that it has meritorious positions in this
litigation, given the inherent nature of litigation, it is not possible to
predict the outcome of this litigation or the impact it would have on the
Company.
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On December 4, 2004, the Company was sued by the law firm of Enenstein
Russell and Saltz, LLP to collect fees that had been billed to the Company in
the amount of $15,233, which had been disputed by the Company. The Company is
defending its rights in the lawsuit. The case is in its beginning stage, and a
trial date has not been set. While the Company believes that it has meritorious
positions in this litigation, given the inherent nature of litigation, it is not
possible to predict the outcome of this litigation or the impact it would have
on the Company.
The Company is party to various other claims, legal actions and complaints
arising periodically in the ordinary course of business. In the opinion of
management, no such matters will have a material adverse effect on the Company's
financial position or results of operations.
Item 2. Changes in Securities
On January 31, 2004, the Company issued 30,000,000 shares of its common
stock to the PMG Shareholders pursuant to its obligations in the PMG Stock
Purchase Agreement. The Stock Purchase Agreement was rescinded on October 14,
2004, effective as of January 31, 2004, and those shares were cancelled and
returned to treasury.
In February 2004, the Company received gross and net proceeds of $5,000
from an individual investor in connection with the sale of 156,250 shares of the
Company's common stock. The issuance of the shares described above was made in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended.
On February 17, 2004, the Company issued 600,000 shares of its common
stock to former convertible debenture holders to partially satisfy its
obligations on a settlement agreement. The shares issued reduced the Company's
settlement obligations by approximately $17,000.
On February 23, 2004, the Company issued a warrant that expires in five
years to Sachi International, Inc. to purchase up to 3,000,000 shares of common
stock at $0.04 a share. The Warrant vests based on the amount of investment
proceeds brought to the Company by the Holder, with 100% vesting if the Holder
brings $500,000 in investment capital. In the event less than $500,000 is
invested, the warrant vests in a pro-rata amount. The closing of any such
investment shall be in the sole and absolute discretion of the Company. Sachi
International, Inc. has not met the conditions for the warrant to vest.
On March 11, 2004, the Company issued 3,200,000 shares of its common stock
to in exchange for services rendered to the Company. Of these shares, 3,000,000
were issued to members of the Company's board of directors, and 200,000 were
issued to legal counsel, in the total amount of $128,000.
On September 3, 2004, the Company received gross and net proceeds of
$25,000 from two individual investors in connection with the sale of 5,000,000
shares of the Company's common stock.
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On October 4, 2004, the Company received gross and net proceeds of $50,000
from an outside investor and issued its convertible promissory note due and
payable one year from the date of issuance. The note bears interest at a rate of
10% per annum, payable on the maturity date. The note can be converted, in whole
or in part, into shares of the Company's Series A Preferred stock, on the basis
of $.005 per share, at any time prior to maturity by either the Company or the
lender. Each share of Series A Preferred Stock may be converted by the holder
into one share of the Company's common stock. If the noteholder converts the
note into Series A Preferred Stock, on or after the note's original maturity
date the noteholder may require the Company to buy back the shares of Series A
Preferred Stock for 110% of the principal amount of the promissory note (the
"Buy Back Provision"). If the Company is unable to do so, the Company's
president, Dennis Calvert, has agreed to buy back the shares on the same terms.
If shares of Series A Preferred Stock are converted into common stock, the
holder has the right to include (piggyback) the shares of common stock in a
registration of securities filed by the Company (other than on Form S-4 or Form
S-8).
The Company's payment obligations under the note may be accelerated upon
the following events: (i) the sale of the Company's assets outside the ordinary
course of business; (ii) a breach of the representations and warranties
contained within the agreement evidencing the loan; (iii) the failure to timely
pay the note; (iv) the Company's default in any other loan obligation greater
than $100,000; (v) the Company's dissolution, liquidation, merger,
consolidation, bankruptcy, or future insolvency; and (vi) the commencement of
any suit that threatens to have a material adverse effect on the Company,
including the entry of a final judgment or settlement in excess of $100,000.
On November 4, 2004, the Company received gross and net proceeds of
$10,000 from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On December 16, 2004, the Company issued 500,000 shares of its common
stock to its remaining former convertible debenture holder to partially satisfy
its obligations on a settlement agreement. The shares issued reduced the
Company's settlement obligations by approximately $8,700.
On January 6, 2005, the Company received gross and net proceeds of $25,000
from an outside investor and issued a convertible promissory note on
substantially the same terms as the previously described note.
On January 7, 2005, the Company received gross and net proceeds of $75,000
from two outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the notes
do not include buy back provisions, and allow conversion into a total of
18,000,000 shares of common stock (at $0.0042 per common share, rather than
$0.005 per Series A Preferred share).
On February 10, 2005, the Company amended its obligations to Dr. James
Seay (the "noteholder") under its promissory note dated November 20, 2003 in the
principal amount of $50,000 and which matured on February 18, 2004. On the
maturity date of the note the Company was obligated to pay the noteholder
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$65,000. The Company has paid the noteholder $30,000 and the balance of $35,000
remains outstanding. The amendment to the note entered into on February 10,
2005, (i) extends the maturity date of the note to February 3, 2006, (ii)
provides for interest to accrue at a rate of 10% per annum (15% upon default),
and (iii) allows for the conversion of the note into 7,000,000 shares of the
Company's common stock, or $.005 per share.
In February, 2005, the Company received gross and net proceeds of $16,000
from three outside investors and issued convertible promissory notes on
substantially the same terms as the previously described notes, except the note
does not include buy back provisions, and allow conversion into a total of
2,261,701 shares of common stock (at $0.007 per common share, rather than $0.005
per Series A Preferred share).
On February 24, 2005, the Company received gross proceeds of $40,000 and
net proceeds of $36,000 from two outside investors and issued convertible
promissory notes on substantially the same terms as the previously described
notes, except the notes do not include buy back provisions, and allow conversion
into a total of 4,000,000 shares of common stock (at $0.01 per common share,
rather than $0.005 per Series A Preferred share).
All of these offerings and sales were made in reliance on the exemption
from registration contained in Section 4(2) of the Securities Exchange Act
and/or Regulation D promulgated thereunder as not involving a public offering of
securities.
Item 3. Defaults Upon Senior Securities
As of March 31, 2004, the Company was in default on the following senior
securities:
(a) $42,100 due to a former advisory board member on a promissory note
dated November 20, 2003 which matured on February 18, 2004. As of the date of
this filing, the amount owed on this indebtedness is $35,000. On February 10,
2004, the maturity date of this note was extended to February 3, 2006. See Part
II, Item 2 "Changes in Securities".
Item 4. Submission Of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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Item 6. Exhibits and Reports on Form 8-K
The exhibits listed below are attached hereto and filed herewith:
Exhibit No. Description
----------- -----------
10.1 Unsecured Promissory Note dated March 7, 2005 in favor of Dennis
Calvert.(previously filed as an exhibit to the Quaterly Report on
Form 10-QSB for the quater ended March 31, 2004, originally filed
with the SEC on March 18, 2005.)
31.1* Certification of Chief Executive Officer of Quarterly Report
Pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2* Certification of Chief Financial Officer of Quarterly Report
Pursuant to 18 U.S.C. Section 1350.
32* Certification of Chief Executive Officer and Chief Financial
Officer of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule
15(d)-15(e).
----------
* Filed herewith
(a) Reports on Form 8-K.
On February 12, 2004, we filed with the SEC a Current Report on Form 8-K,
regarding the proposed transaction with PMG. (Note, however, that on October 15,
2004, we filed with the SEC a Current Report on Form 8-K, regarding the
rescission of this transaction.)
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, hereunto
duly authorized.
NUWAY MEDICAL, INC.
Date: March 23, 2005 By: /s/ Dennis Calvert
--------------------------------
Dennis Calvert
President, Chief Executive
Officer and Interim Chief
Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer of Quarterly Report Pursuant
to Rule 13(a)-15(e) or Rule 15(d)-15(e).
31.2 Certification of Chief Financial Officer of Quarterly Report Pursuant
to 18 U.S.C. Section 1350.
32 Certification of Chief Executive Officer and Chief Financial Officer
of Quarterly Report pursuant to Rule 13(a)-15(e) or Rule 15(d)-15(e).
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